Archive for July 2017


Wait, which tax are they repealing?

You really need a sense of humor to read the news these days.  Here’s Matt Yglesias, describing the Senate Majority leader:

Many more moderate House members, meanwhile, told themselves the real bill would be written by the Senate, which no doubt would be less harsh on Medicaid. Instead, McConnell opted to be harsher and has not softened it even slightly, even though he has hundreds of billions of dollars of flexibility.

Bizarrely, instead of addressing the issue, “McConnell has told several hesitant senators (including Portman and Sen. Shelley Moore Capito (R-W.Va.): The bill’s deepest Medicaid cuts are far into the future, and they’ll never go into effect anyway.”

McConnell made deep Medicaid cuts to please the GOP conservatives, knowing that none of this will ever go into effect.  Yglesias has a nice graph showing the recent changes:

So they had to rescind one of the tax increases, and they chose the tax on medical devices over the tax on saving and investment?  They chose to cut taxes on a massively subsidized industry instead of paring back taxes on savers who are already double taxed on the same income?  Is this the modern GOP, or the AMA?

I recall that back during the campaign some Republicans convinced themselves that Trump was a supply-sider, pointing to his “support” of a 25% top tax rate, ending the extra Obamacare taxes on capital, ending the AMT, ending the estate taxes, etc., etc.  A supply-side miracle bringing us 4% RGDP growth and tens of millions of jobs.

I can hardly wait!

PS.  If it’s monetary policy you want, it’s over at Econlog.

PPS.  So the Federal government will launch a $45 billion war on opioids.  What could go wrong?

The Economist on Trump’s America

The Economist has a long article on how American politics is changing.  The entire piece is worth reading, here are a few examples:

Back in 2011, white evangelicals were the most likely group to say that personal morality was important in a president, according to the Public Religion Research Institute. Since Mr Trump became the Republican standard-bearer, they have become the least likely group to say that, changing what seems like a fundamental issue of morality to accommodate their support for the president.

And this:

The president’s admirers describe him as “situational”, by which they mean he has no ideology to speak of and judges each decision that comes before him in isolation. That explains, they say, how he can denounce President Obama for bombing Libya to prevent its government from killing its citizens, then launch a cruise-missile strike against the Syrian government to do the same thing. The president often seems to be pursuing the Breitbart strategy, only then to head in the opposite direction. On April 12th he cancelled a federal hiring freeze he had ordered in his first week in office; decided against labelling China as a currency manipulator; endorsed the Export-Import Bank, which provides finance to big companies like Boeing; and declared NATO relevant after all, breaking three campaign promises and abandoning one favourite theme in a single day. A little over a month later he changed direction again, declining to endorse explicitly NATO’s article 5, which says that an attack on one member is an attack on all, and pulling out of the Paris agreement on climate change. There is no consistent thread running through what he does; he can change his mind at any moment.

One of the president’s informal advisers says he cares more about getting something that looks like a win than about pursuing any particular policy. That would explain why he sometimes seems unaware of the details of policies he has advocated. When his administration on its 100th day in office got close to pulling out of NAFTA, it came as news to the president that some of his voters benefited from membership of the trade block. [emphasis added]

Interesting that it’s the “president’s admirers” who notice that he has no core values.

During the campaign Mr Trump offered to pay the legal costs if someone beat up a protester at one of his rallies. The ANES asked voters whether protesters who got roughed up for disrupting political events generally deserved what happened to them. Some 30% of Trump voters said protesters deserved it “a lot” or “a great deal”; only 18% replied “not at all”. As long as it is the other side that suffers, a degree of violence is acceptable, even welcome.

It is extraordinary that such a prosperous, peaceful, fortunate country, with such deep democratic traditions, could have arrived at this point, but it has. “So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distractions have been sufficient to kindle their unfriendly passions and excite their most violent conflicts,” wrote James Madison in Federalist Paper No 10. The Trump presidency could yet go in several directions. The one that seems definitely blocked is the route back to a land where it is rare to think that political opponents deserve to be beaten up. Perhaps that country no longer exists.

In the next post we’ll see how Trump’s incompetence will lead to a very bad outcome for healthcare reform.

BTW, I’m not surprised to hear that lots of people are comparing Donald Jr., to Fredo, but I wasn’t aware that Trump insiders saw this well before the rest of us:

Perhaps it’s no wonder that Trump’s inner circle has been calling him Fredo since the campaign.

It brings a smile to my face thinking about all of the Trump lawyers desperately trying to clean up the mess as one Trump after another makes a fool of himself.

I know, it’s just unsubstantial leaks that the Trump campaign was trying to collude with the Russian government to stop Hillary.  Why trust that crazy Fredo look-alike?

Why China will democratize

Tyler Cowen has a new Bloomberg article discussing why China may never democratize:

The argument that China will become democratic rested on observations of Japan, Taiwan and South Korea, all nearby countries that became democratic or sustained a democracy once they were sufficiently wealthy. The middle classes in these countries wanted accountable government, and ultimately the autocracies were willing to step aside and support democratic transitions, albeit with the Japanese path being more closely linked to the American postwar settlement and occupation. Much of Eastern Europe and Latin America became democratic too, and so it seemed plausible that China might be next in line.

Conversely, there are two powerful arguments that China will not become democratic. First, China never has been democratic in thousands of years of history, and perhaps that history simply will continue.

Second, the middle to upper middle class is still a minority in China, and will stay so for a long time. A smaller country can build up in percentage terms a larger middle class, by exporting, than can a very large and populous country. There’s just not enough demand in global markets to elevate all or even most of the Chinese people, and so Chinese inequality likely will stay high, to the detriment of democratic forces.

In essence, many of the wealthier Chinese trust the Communist Party to look after their interests more than they trust elections.

Both of these arguments are wrong, although the final sentence I quoted is entirely accurate.  Many affluent urban Chinese do not support democracy because they worry that it would turn the country over to the rural poor.  Today.

Nonetheless, both of Tyler’s arguments are wrong:

1.  The fact that China has thousands of years of non-democracy carries exactly zero weight, because all countries had thousands of years of non-democracy before becoming democratic. It’s simply not a “powerful argument”—it carries no weight. So the fact that East Asia is increasingly democratic is very relevant.  Those East Asian democracies also had thousands of years of non-democracy before first becoming democratic.

2.  And it’s true that the middle and upper middle class are still a minority in China, but it is not true that things will stay that way for a very long time. China will be mostly middle class by 2050. A big issue in China today is the fact that working class wages are rising faster than professional white collar wages, and indeed are often higher. College grads complain that factory workers and construction workers make more than they do.  And all wages are rising very fast.

In my view the relevant odds are as follows:

1.  Odds of China becoming democratic:  95%

2.  Odds of China never becoming democratic, and most of the rest of the democratic world reverting to authoritarianism:  4.99%

3.  Odds of China never becoming democratic, but most of the rest of the developed world staying democratic:  0.01%

So if China really never does become democratic, the real story is that democracy will fade away in the rest of the world.  It’s simply not plausible that we’d continue on for hundreds of thousands of years with China non-democratic and South Korea, Japan and Taiwan democratic.  That’s not how things work.  Something has to give.

You can’t be pessimistic about China and optimistic about the world, at least in the very long run.

PS.  Here’s China Daily, telling white collar workers to stop complaining that blue collar workers make more than they do:

Manual workers deserve the high wages they get

DATA ON AN employment exchange website show the average monthly income of construction workers in Chengdu, Sichuan province, was 8,300 yuan ($1,210) last year, with skilled bar benders, bricklayers, carpenters and painters earning more than 10,000 yuan. In contrast, the average monthly salary of clerks and secretaries was about 3,800 yuan. An article on comments:

The huge income gap between blue-collar and white-collar workers may be surprising for many people. But manual workers’ incomes have been rising over the past few years because of the supply-demand law.

Each year, 7 million college graduates enter the job market, while the number of skilled laborers joining the workforce is much lower, because it takes years for a worker to become an expert in his/her field while clerks can learn their job in months.

If blue collar workers really are making $15,000/year, in a country with a much lower cost of living than the US, then I may be excessively conservative in my 2050 date for a majority of China being middle class.  It’s coming faster than almost anyone imagined.

HT:  TravisV

Making the Fed more accountable

I’ve been very busy recently, and thus confining my posts mostly to Econlog.  I have a new example today, discussing David Beckworth’s interview of Steve Horwitz.  I also have a new piece at US News and World Report on how to make the Fed more accountable, which may be of interest.

The Fed’s two mistakes

Tim Duy has an excellent piece in Bloomberg, discussing the Fed’s perspective on the economy:

Core leadership at the Federal Reserve appears determined to normalize policy via interest rate hikes and balance sheet reduction. But they have run up against a significant roadblock because the inflation data stubbornly refuse to cooperate with their forecast. Don’t expect that to deter leaders of the U.S. central bank just yet. They generally view the inflation weakness as transitory. A labor market circling around full employment serves as the justification they need to keep their foot on the brake.

And if that weren’t enough, they can pivot their focus toward financial stability. Indeed, that’s already underway. But be warned: that road will almost certainly lead to excessive tightening. In it you can see one path by which this expansion comes to an end.

I believe the key test will occur in 2018.  If inflation stays low, the Fed will need to change course or else lose credibility.  Duy worries that low inflation might not be enough to get the Fed to back off from its policy intentions:

Still, one would reasonably think that low inflation would eventually worry a central bank with an inflation target. Indeed, the minutes of the June FOMC meeting noted that “several” participants were concerned that recent inflation weakness would be more persistent than transitory. If such concerns appear justified as the year continues, and especially if combined with a softer labor market, the Fed will reduce its projected path of interest rates.

But the Fed has another worry — that of financial instability driven by a persistent low interest rate environment. That worry was on clear display in recent weeks. Yellen described asset prices as “somewhat rich.” Vice-Chair Stanley Fischer worried that low interest rates are driving home prices higher. And New York Federal Reserve President Bill Dudley warned that the Fed needs to account for the “evolution of financial conditions” when setting policy.

I think Duy is right to be somewhat concerned.  It seems to me that the Fed is wrong about both inflation and asset bubbles, for essentially the same reason.  In recent decades, the Fed has pretty consistently overestimated the natural rate of interest.  If the natural rate is lower than the Fed assumes, then both of these claims are true:

1.  Equilibrium asset prices are higher than the Fed believes.

2.  The Fed’s current policy stance is tighter than the Fed assumes, and hence unlikely to deliver on target inflation going forward.

The markets have been telling us that:

1.  The Fed is likely to raise rates by less than it assumes.

2.  Inflation is likely to be lower than the Fed assumes.

3.  Assets are worth more than the Fed assumes.

Three areas of disagreement, but all boil down to the issue of the equilibrium or “natural” rate of interest.

It’s quite possible that the Fed will be right and the markets will be wrong.  That’s happened before.  But if I were a betting man I’d put my money on the markets.